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11 Mar 2016

Time to drop money on normal people

Here's my micro/macro perspective on "addressing" the Great Recession:

Interest rates in the US, EU and elsewhere are near (or below) zero because central banks seem to think they can stimulate growth via supply-side (cheap money) policies. I would argue that growth is stalled on the demand side (i.e., weak business climate, debt overhang, and underemployed workers).

Current stimulus policies are poorly directed and too timid.

They are poorly directed because cheap money to banks has only led to bankers buying stuff they like (financial instruments, luxury goods and politicians). What we need instead is to give money to normal citizens who will spend it on a diverse range of goods (including paying down their debts). Funding to citizens will also reduce inequality.

Current policies are too timid because monetary expansion (AFAIK) is sterilized by proportionate increases in government debt or central bank balance sheets. I suggest just printing money (say 1 percent of a broad measure of supply) without bothering to create offsetting liabilities. This is known as the "dropping money from helicopters" solution.

Yes, I am saying that we should ignore fears of monetary inflation and the money illusion. First, we surely need inflation, so extra money is no bad thing. Second, the money illusion will not just result in equal price inflation across the economy. Instead, there will be demand-driven inflation (prices rising from demand, not more money) in places where people see value. Such a result is socially efficient because it uses the price mechanism to allocate additional funds to reward relative value.

Who can lose from this idea? Debtors who will see their "relative wealth" diluted by the distribution. Germans, for example, will "lose" relative to Greeks if both add €1,000 to their accounts (Germans with a net worth of €50,000 each go up by 2 percent; Greeks with €5,000 each go up by 20 percent). This should not matter too much because Germans will also be getting money, Greeks are hardly paying Germans back now, and some Greek spending is sure to end up in German pockets (and perhaps vice versa).

Bankers and politicians will also lose, of course, as current policies are (1) inflating the value of financial assets bankers hold and (2) keeping politicians busy because those policies do not work.*

Bottom Line Many people are stressed by debt and lack of funds at the same time as governments are trying to make money so cheap that people will borrow and spend it. Skip the borrowing and give people money if you want them to spend, reduce problematic inequality, and boost useful parts of the economy.* Just saw "The Big Short," which is a good movie about the crazy instruments Wall Street invented to make money for themselves. (Here's my Aug 2007 -- pre-Lehman bankruptcy -- prediction that the subprime crisis was going to get worse.) Don't also forget that incompetent corrupt government (and some corrupt economists) had a lot to do with the crisis. I suggest listening to this interview with Luigi Zingales, one of the clearest thinkers on government failure (yes, he's Italian).